Marketing Health Insurance through "Trusteed Groups": a Perversion of the Group Insurance Concept

Eligible Groups

The groups to which a group policy can be issued are well known in regulatory and industry circles. Typically, group statutes permit the issuance of group policies to:

• Single employers
• Multiple employers
• Labor unions
• Debtor-creditor groups
• Associations
• Credit unions

State rules may also permit issuance of a group master policy "to cover any other substantially similar group which in the discretion of the Commissioner (of Insurance) may be subject to the issuance of a group … policy or contract." (See for example, Georgia Insurance Code 33-30-1(5) and Alabama Insurance Code 27-20-1(5).) From this language arises the notion of a "discretionary group." Accordingly, when policy forms are filed, regulators may be advised that the master policy is issued to a discretionary group in a foreign jurisdiction.

Three things are notable about the legislative language:

• It is the discretion of the Commissioner, not that of the company or the trust, to confer recognition on the group.
• Acceptance or approval of policy forms and rates is not approval of the group.
• The statute sets a standard upon which the Commissioner is to rely in determining whether to recognize the group, the standard being that the discretionary group must be substantially similar to the other eligible groups.

The NAIC Group Health Definition and Group Health Insurance Standard Provisions Model Act adds additional criteria for the approval of discretionary groups. Section 2 of the 1983 Model Act found in some insurance codes states:

1. No such group health insurance policy shall be delivered in this state unless the commissioner finds that:
   1. The issuance of the group policy is not contrary to the best interest of the public;
   2. The issuance of the group policy would result in economies of acquisition or administration; and
   3. The benefits are reasonable in relation to the premiums charged.
2. No such group health insurance coverage may be offered in this state by an insurer under a policy issued in another state unless this state or the state in which the group policy is issued, having requirements substantially similar to those contained in Subsections (A)(1), (2) and (3), has made a determination that the requirements have been met.

This provision is to be read in the conjunctive, not the disjunctive.

What characteristics should the discretionary group possess to be substantially similar to other eligible groups? I address this question by first describing what traits one finds among the eligible groups, including:

1. They were not formed for the purpose of buying insurance; rather, insurance is incidental to their existence.
2. Related to (1) is the fact of duration: the groups have been around for some time and have some stability.
3. Eligible groups have a governing structure. Employers have a corporate structure and a chain of command; unions have strict governing structures regulated by federal labor law; legitimate associations and credit unions have elected governing structures; debtor-creditor groups have a business relationship, but the group insurance available is usually limited to credit life, disability, or other policies with limited benefits.
4. Rank-and-file members of the eligible groups have a set of common interests.

When the statutes have received judicial construction, this element of common interests receives special notice. For example, the Texas Supreme Court stated that one of the legislative purposes in limiting the types of entities eligible to procure insurance for a group of persons may well and reasonably have been to make certain that the agency purchasing the insurance bore such a close relationship and kinship of interests with the individual insureds that the agency could and would know the insurance needs of the individuals in the group and would use his money (if he contributed) to see that those needs were served. SeeBoard of Ins. Commissioners v. Great Southern Life Ins. Co., 239 S.W.2d 803 at 811 (Tex. 1951).

In upholding a state statute restricting entities to which a group life contract could be issued, the Texas Supreme Court further construed the meaning of "group." According to the court, the state legislature has the:

right to limit the writing of group insurance to situations where there [is] a close relationship and an affinity of interests between those making up the insured group and the person or agency contracting with the insurer for the insurance. See State of Texas v. State Mutual Life Assurance Company of America, 353 S.W.2d 412 at 418-419 (Tex. 1962).

Discretionary groups do not even come close to satisfying these criteria. Here is why. A master policy is issued to the trust, but the insurer maintains control over the policy administration. As in group insurance, enrollees get a certificate of coverage, not a policy form, thereby reinforcing the appearance of group insurance. Joining the trust is usually done at the time insurance is purchased, but the new trust members have no knowledge of what the trust is or how it is governed, nor do they gain any special benefit beyond the opportunity to buy insurance.

In fact, it is not at all uncommon for the trust agreement or some other document to stipulate that insureds have no say whatsoever over the trust or the conduct of the trustee. The trustee group has no governing structure, no by-laws or constitution, no meetings, no assets. Further, certificate holders have no affinity of interests; indeed, if one certificate holder knows the identity of another, it is most likely a mere chance occurrence. Aside from being human beings, trustee group certificate holders have two things in common: (1) they hold certificates of insurance and (2) they breathe air. It is this latter trait that leads marketers of such plans to characterize the insureds as an "air breather group." In trust law, it is an illusory trust.

In an individual policy, the insured is the policy owner; in group insurance, the entity to which the policy is issued is called the master policyholder. In delineating the different roles played by the insurer and the master policyholder, certain duties and functions are expected of the master policyholder, including negotiating terms and conditions of coverage, reviewing the performance of the plan of insurance, and determining whether to continue the group contract or to seek another insurer if relationships go awry. In this regard, the master policyholder's interests coincide with the interests of the certificate holders and, generally, the master policyholder is said to act as agent of insureds in fulfilling these duties.

A direct consequence of the trusteed group arrangement is that the master policyholder's role is emasculated through the insurer's retention of control over the contract. Without the intermediary role of the master policyholder, the insured-insurer relationship is the same as would be the case in a regular individual policy: all relationships are directly between the insurer and insured for applications, claims, premium payments, and other matters. There is no master policyholder to evaluate the insurer's market conduct and methods of premium determination even when premiums raise serious questions about benefits being reasonable in relation to premiums charged—no master policyholder intervenes to take the business elsewhere as might occur in a genuine group policy relationship when problems arise.

The Maryland Court of Appeals confronted just such an arrangement in 1982 in Guardian Life Ins. Co. of Am. v. Insurance Commissioner of the State of Maryland, (293 Md. 629), concluding:

The trust … is essentially one in name only, an artifice which serves no legitimate purpose…. In actuality, because Guardian itself is in total control of the trust fund, the trustee is, at best, an entity without substance and cannot therefore function as the "policyholder"….

The Maryland court saw a form-over-substance arrangement, recognizing that the master policyholder position was a fiction.

Having eliminated the master policyholder's function in trusteed groups, insurers are able to operate in a virtual laissez faire manner. Since the group is essentially a fiction, an insurer may engage in individual underwriting, post-claims underwriting of individuals (as opposed to experience rating of the group), durational rating (increasing premiums based upon how long one has been insured), and tier rating (separating insureds into tiers based on claims experience after the policy is issued). In fact, rating classifications that initially appear to be based on objective factors (age, geography, gender, occupation, etc.) may be modified and replaced by claims experience on policy renewal and insureds may be moved from one classification to another as their claims costs increase or as the prospect of more costly claims in the future are ascertained by the insurer. Such practices, unlawful in many jurisdictions, would not be tolerated in a genuine group policy by the master policyholder.

Thus, the discretionary group form of insurance is hazardous to policyholders—it negates the crucial function of the master policyholder; and it does not conform to the basic characteristics of group insurance. It is also questionable as to whether discretionary groups serve a lawful purpose.

Trusts must be established for lawful purposes, so are there indications that air breather groups are designed to achieve unlawful purposes? Both case law and regulator market conduct examinations suggest that air breather marketing methods are designed to evade state regulation. In Guardian cited above, the insurer argued that since its master policy was issued to a trust located in Rhode Island, Maryland law could not apply to certificates issued in Maryland. The court, penetrating the form to find no substance to Guardian's argument, held otherwise.

That the issue of extra-territorial jurisdiction was a subject of concern in the 1980s when trusteed groups began to flourish is further evidenced by the Georgia Commissioner's 1987 directive to insurers reminding them that Georgia rejected such spurious arguments. More recently, a Colorado market conduct examination reviewed an insurer that is well known for using trusteed groups. Colorado regulators concluded that the company was marketing an individual policy as a group policy. Under most state insurance codes, this is a deceptive trade practice. Additionally, both Alabama and Georgia commissioners have issued directives affirming obligations of air breather "one-life groups" to comply with deceptive trade practice statutes prohibiting unfair discrimination in rating (Alabama) and small group regulations (Georgia).

Thus, the unlawful purposes served by trusteed group marketing seem to be that companies use it to sell individual insurance as group insurance, it is used to engage in unfairly discriminatory rating practices, and it is a means of circumventing small group reform laws. Consumers are best advised to avoid the purchase of such products.